Yahoo Finance ECB follows Bank of England and Federal Reserve in pausing interest rates
European Central Bank will start tapering PEPP from mid-2024
The European Central Bank (ECB) has followed in the footsteps of the Bank of England (BoE) and the US Federal Reserve, keeping its three key interest rates unchanged for its final meeting of 2023.
Its deposit facility, which determines the interest that commercial banks receive for depositing money with the central bank overnight, remains at a record high of 4.0%.
The interest rate on the ECB’s main refinancing operations was held at 4.5%, and the marginal lending facility, charged when commercial banks ask for short-term loans, remains at 4.75%.
At a press conference in Germany, ECB president Christine Lagarde said that bank did not discuss cutting interest rates at all at this month’s meeting, adding that “between hike and cut there is a whole plateau, a whole beach of hold”.
She pushed back on market expectations, saying “we should absolutely not lower our guard” against inflationary pressures.
It comes after 10 consecutive hikes that began in July 2022, and as consumer prices in the eurozone only rose by 2.4% in the year to November. Core inflation also went down.
As inflation has fallen faster than expected, investors have now increased their bets for ECB rate cuts in 2024, currently pricing in almost 150 basis points of rate cuts next year.
Read more: LIVE: FTSE 100 surges as Bank of England holds interest rates
“The risk is now earlier and larger cuts, and an ECB more capable of decoupling from the Fed,” said Mark Wall, an ECB watcher with Deutsche Bank (DB).
However, the central bank said that “while inflation has dropped in recent months, it is likely to pick up again temporarily in the near term”.
It also cut its inflation forecasts as expected, predicting inflation will average 5.4% in 2023, before dropping to 2.7% in 2024, 2.1% in 2025, and 1.9% in 2026.
Earlier on Thursday, Threadneedle Street left UK interest rates on hold at a 15-year high of 5.25%, with the monetary policy committee (MPC) voting by a majority of six to three.
Money markets are now predicting that the Bank of England will reduce interest rates by five quarter-point cuts next year, down from the current levels to 4%.
The ECB previously said it would start tapering reinvestments from its €1.7trn ($1.85trn) Pandemic Emergency Purchase Programme (PEPP) from mid-2024. On Thursday, Lagarde said that the decision on PEPP reinvestments had no bearing on the ECB's interest rate decisions.
Meanwhile, the US Federal Reserve decided to hold rates steady on Wednesday, signalling that rate rises were coming to an end.
The Fed sees 75 basis points of rate cuts coming in 2024, which accounts for one more rate cut than had been projected in September.
Read more: Bank of England holds interest rates amid expectations of cuts in 2024
Jim Reid, strategist at Deutsche Bank, said: "Yesterday’s FOMC meeting did its best to give investors an early Christmas present, all packaged with a bow and extra special gift wrapping. In turn this added more fuel to the soft landing narrative."
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Given this backdrop, expectations of rate cuts in early 2024 are likely to focus first on Europe as a result of the economic predicament it is facing, even despite the Fed’s pivot yesterday.
"Germany is in recession and its other economies are hardly firing on all cylinders. Should growth continue to be hard come by, businesses, politicians and investors will be clamouring for the ECB to begin cutting rates and stimulate the economy.
"However, given the cautiousness at the beginning of the rate hiking cycle, it is unlikely the ECB will want to act quickly on cutting rates, instead favouring an approach where it is sure inflation is under control and there wouldn’t be any unintended consequences from its actions."
He added: “Higher for longer will continue to be the message, but in Europe that narrative is likely to be tested to the max and we could easily see it have to pivot first out of all the developed central banks.”
Watch: How does inflation affect interest rates?
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